Robert Ferguson and Dean Leistikow Volume 1, Number 4, Fourth Quarter 2003 Ferguson and Leistikow [(1997). Journal of Financial Engineering 6, 1-13] (FLa) was the first long-run risk-neutral analysis of the performance volatility incentives created by investment management fee structures. This paper extends FLa in six ways. It allows the portfolio’s value to change, incorporates… Read more
Articles
Resampled Frontiers vs Diffuse Bayes: An Experiment
Harry M. Markowitz and Nilufer Usmen The experiment reported here compares two methods for handling uncertain inputs to a mean-variance analysis. Specifically, it compares Michaud’s resampled frontier versus Bayesian inference with diffuse prior. A simulated “referee” generates ten “truths” about 8 asset classes. For each truth it randomly generates one hundred histories. A simulated “Bayes… Read more
Fund Managers May Cause Their Benchmarks to be Priced “Risks”
Michael Stutzer Volume 1, Number 3, Third Quarter 2003 The presence of a positive intercept (“alpha”) in a regression of an investment fund’s excess returns on a broad market portfolio’s excess return (as in the CAPM) and other “factor” portfolios’ excess returns (e.g. the Fama and French factors) is frequently interpreted as evidence of superior… Read more
Do Short Sellers Cause the Weekend Effect?
Honghui Chen and Vijay Singal Volume 1, Number 3, Third Quarter 2003 We provide a new explanation for the weekend effect. Our hypothesis is based on the contention that speculative short sellers are unwilling or less likely to hold their positions over long non-trading periods, typically the weekend. Therefore, they buy to cover on Fridays… Read more
Enhanced Equity Indexers: Common Traits and Surprising Differences
James Scott and Margaret Stumpp Volume 1, Number 3, Third Quarter 2003 This paper investigates the type of returns-based data a consultant or institutional investor would confront when analyzing an existing enhanced index manager or searching for a new one. The paper presents findings about different types of enhanced managers. Among them, and not surprisingly… Read more
Is Stock Return Predictability Spurious?
Wayne E. Ferson, Sergei Sarkissian, and Timothy Simin Volume 1, Number 3, Third Quarter 2003 Two problems, spurious regression bias and naive data mining, conspire to mislead analysts about predictive models for stock returns. This article demonstrates the two problems, how they interact, and makes suggestions for what to do about it… Read more
Time Diversification
Jack L. Treynor Volume 1, Number 1, First Quarter 2003 To maintain constant dollar risk, an investor concerned with his terminal wealth must sell when the stock market rises and buy when it falls. Although an asset with constant dollar risk doesn’t exist in nature, it can be approximated with actual investment positions… Read more
The Treynor Capital Asset Pricing Model
Craig W. French Volume 1, Number 2, Second Quarter We explore unpublished early work of Jack Treynor, who deserves credit for the original Capital Asset Pricing Model because of his revolutionary manuscripts, “Market Value, Time, and Risk” and “Toward a Theory of Market Value of Risky Assets”, which were circulated during the 1960s but have… Read more
Fiscal Policy and Inflation: Pondering the Imponderables
Eric M. Leeper Volume 1, Number 2, Second Quarter 2003 An asset-pricing perspective on inflation reveals that it depends on current and expected monetary and fiscal policies. There are three ways to carry $1 today into the future: money, bonds, and real assets. That dollar’s purchasing power varies inversely with the price level. Expected money… Read more
Short Volatility Strategies: Identification, Measurement, and Risk Management
Mark Anson and Ho Ho Volume 1, Number 2, Second Quarter 2003 Many investors demand position transparency from hedge fund managers in the belief that more information is better than less. However, certain hedge fund strategies create synthetic investment positions that resemble a short put option, and these positions are not revealed by position transparency… Read more